Closing Recap

Thursday, July 09, 2020

Equity Market Recap

·     U.S. stocks finished mixed as the disconnect between technology and every sector grows further apart by the day, as the Nasdaq Composite has now risen 16 of the last 19 days to new record highs, including a near 8% spike over the last 8-trading days as investors pile into large cap giants (AMZN, AAPL, FB, GOOGL, NFLX, NVDA). At the same time the S&P 500 and Dow pulled back, led by a sharp decline in Financials, Industrials and Utilities amid rising coronavirus cases in several U.S. states still. YTD performance shows the NASDAQ up over 17%, while the Dow is down around 10%, the S&P -2.5% YTD and the SmallCap Russell 2000 down -15 YTD as large caps dominate. The NASDAQ did roll late day after Nomura reported that AAPL’s China iPhone June sell-in data was weaker than expected. Nasdaq 100 is pacing gains, while the semiconductor index ploughed ahead with new all-time highs as well. Asian markets have seen a massive resurgence, with Chinese equities rising for the 8th straight day (up 16.5% during that stretch). Defensive and safe-haven assets saw gains as the dollar rebounded from recent losses while Treasury prices rise (10-yr yield below 0.6% briefly) and gold fell from 9-year highs.

·     Stocks slipped this morning following headlines the U.S. Supreme Court upheld a New York grand jury subpoena for President Donald Trump’s tax returns and other financial records, rejecting his call to give presidents complete immunity from criminal investigation while in office. Reuters also reported the U.S. to bar companies from government contracts that use products or services from china’s Huawei, ZTE, Hytera Communications, among other. Weekly jobless claims still a massive number, but coming in “less-bad” helping market sentiment. Again, markets fairly unphased by the rising case of COVID-19 cases in the US which saw more than 60,000 new daily COVID-19 infections recorded in the U.S. yesterday.

·     Several factors playing a part in market volatility right now: Is the market reopen working (getting mixed signals from restaurants and retailers thus far as WBA did not offer optimism after its report today)? Is additional stimulus from the government on the way (hopes for more money)? What about a vaccine or treatment for COVID-19 – with all sorts of comments from officials for hopes by end of year. Earnings season coming up can likely be a positive for shares with results widely expected to disappoint across various sectors (ex-tech) thus bad news partially baked in (guidance going forward could be key). Valuations for several sectors (namely tech) remain a concern – are prices overheating? Wild cards for major averages remain details of trade talks with China going forward as well as election risk in November.

Economic Data

·     Weekly jobless claims fell to 1.314M from downwardly revised 1.413M from 1.427M prior week and compared to the 1.375M estimate; continuing claims drop to 18.062M vs. est 18.75M and compared to last week 19.29M; 4-week avg fell to 1,437,250 July 4 week from 1,500,250 prior week (previous 1,503,750); insured unemployment rate fell to 12.4% from 12.9%

·     U.S. May wholesale inventories unrevised at down (-1.2%) in-line with estimates; May wholesale sales +5.4% vs. April (-16.4%); Wholesale inventories excluding oil fell 1.5% in May

Commodities

·     Oil prices remained weak, as WTI crude fell -$1.28 or 3.1% to settle at $39.62 per barrel amid ongoing concerns that renewed lockdowns in parts of the U.S. to contain the spread of coronavirus would again pressure energy demand. Brent crude fell 94c or 2.17% to settle at $42.35 per barrel. The United States reported more than 60,000 new COVID-19 cases on Wednesday, the biggest increase reported by a country in a single day. The renewed orders are likely to dent any sustained recovery in fuel demand.

·     Gold prices slumped -$16.80 or 0.9% to settle at $1,803.80 an ounce, pulling back from 9-year highs (and not far off its all-time highs which is just shy of the $1,900 an ounce levels) as profit taking ensued given the bounce back in the dollar off 2-week lows. Gold, which is normally seen as a “safe-haven” asset has rallied despite surging global stock markets as they rebound from the pandemic-inspired selloff suffered earlier this year. Efforts by global central banks to push down interest rates has weighed on the dollar, in turn helping commodity prices.

Currencies & Treasuries

·     Treasury yields fell on both the long and short end of the curve, getting a late day boost after an auction of 30-year bonds showed continued strong demand for the safe-haven government debt amid the relentless COVID-19 pandemic. The U.S. Treasury sold $19B in 30-year notes at a yield of 1.33% vs. 1.357% when issued prior, as the bid-to-cover (demand) was 2.5% vs. 2.3% prior and indirect bidders were awarded 72% of auction and directs 10.5%. The 30-year yield fell to its lowest levels since late May today while the 10-year yield dropped 65 bps to lows of 0.60%. U.S. stock indexes dropped on Thursday as fears of another lockdown to contain a surge in coronavirus cases overshadowed data pointing to a declining trend in weekly jobless claims. The U.S. dollar saw solid gains, bouncing off yesterday 2-week lows in a flight to safe haven instruments given the pullback in the S&P 500 and Dow Industrial Averages.

Coronavirus updates:

·     U.S. CDC reports 64,771 new coronavirus cases as of yesterday; total cases now 3,047,671 vs 2,982,900 in previous report on July 8 and reports 991 new deaths due to coronavirus as of yesterday; total deaths now 132,056 vs 131,065 in previous report on July 8^th. Florida Covid-19 cases rise 4% vs previous 7-day avg. 5%, reaching 232,718 vs. 223,783 day earlier while reported covid-19 deaths up record 120. Arizona virus cases rise 3.7%, matching prior 7-day average with 33% positivity rate (4,057 tested positive out of 11,931 tests in the state – highest total in about a week). Alabama sees biggest covid-19 spike to date, 2,164 cases

Sector News Breakdown

Consumer

·     Retailers; COST said June net sales were $16.18B, five weeks ended July 5, 2020, an increase of 11.1% while June total comp sales rose 11.5% and US comp sales ex: gas and FX rose 13.6%; BBBY shares slipped after plans to close 200 stores over the next two years and as Q1 sales plunged 49% due to the Covid-19 pandemic; BGFV rises after saying it expects Q2 net sales to be about $228M vs. $241M YoY saying sales and margin momentum has continued and for the 2H of Q2, same store sales increased by 15.5%with very strong merchandise margin; DKS shares slid after Morgan Stanley said the Ivy League canceling Fall sports is a temporary headwind

·     Consumer Staples; KDP was upgraded from Neutral to Buy at Goldman Sachs as see a favorable risk/reward ahead of Q2 results (likely early August) as we expect a beat-and-raise quarter; STZ was upgraded from Hold to Buy at Argus with $230 tgt as expect STZ to emerge from the coronavirus pandemic in a position of strength as beer shipments remain brisk and the company moves past the headwinds created by the sale of certain Gallo products; TPB 2M share Spot Secondary priced at $23.50 while also issues preliminary Q2 net sales of $100M vs. guidance for $81M to $87M and the consensus of $85.0M

·     Restaurants; JACK was added to the Best Ideas list with $95 tgt at Wedbush and increasing our FQ3 SSS growth estimate on continued near-term SSS growth momentum; CMG tgt to $1,450 from $1,100 and WING to $158 from $143 and publishing domestic checks for June which highlight sequentially improving trends across the industry. More specifically, brands that have made digital investments are seeing the benefits through greater traction with guests, leveraging the off-premise and delivery channels (positive for WING, CMG, EAT); WING was downgraded to neutral at BTIG following a historic rise in same-store sales, as the concept’s investments in digital, delivery and advertising resonated with consumers during the pandemic

·     Housing & Building Products; ZG says fewer sellers are cutting prices in tight housing market and only 4.1% of current listings have had price cut, compared to 5.6% at same time last year; MHK shares plunge a third day – recall Deutsche Bank cited recent fraud allegations in a note yesterday against the company that has prompted numerous investors to raise concerns about its guidance

·     Casino & Leisure movers; SIX was upgraded, and SEAS and FUN downgraded at Janney in the theme park sector saying short-term stock performance for the theme parks will depend on the spread of Covid-19 and government reaction; NCLH files to sell 46,577,947 share on behalf of a selling shareholder in a new offering; also, the company’s auditor no longer has a going concern warning tagged on the cruise line operator; CCL said it will resume its German cruise line AIDA Cruises in August – cruise operators have suspended voyages till August due to travel restrictions amid the COVID-19 pandemic; ERI received approval from Nevada casino regulators to buy Las Vegas-based CZR in a $17.3 billion deal; HOG upgraded to buy at Northcoast after most recent checks uncovered: 1) better than expected July shipments into the U.S., 2) incremental contraction in the used vs. new pricing gap and 3) signs of new riders entering the industry

Energy

·     Energy stocks crept lower most of the morning as oil prices faded from 4-month highs this week (down off the $41 per barrel level); in gas leveraged sector, CNX, RRC, SWN all upgraded to buy from neutral at MKM Partners as move gas price deck from $2.65 to $3 in 2021 and our long dated price from $2.65 to $2.80 vs the current price of $2.65 as look into the second half of 2020 with the supply erosion intensifying we see a fundamental balance. In MLP/Midstream; EPD was upgraded to overweight at Piper saying it offers a solid risk/reward proposition and for the midstream group, while much uncertainty remains, remain hopeful we are past the worst of the downturn and upgrading a best-of-breed midstream company makes sense

Financials

·     Bank movers; financials were among the worst performing sectors in the S&P; JPM was upgraded to buy with $117 tgt at DA Davidson ahead of earnings next week; Wolfe Research also upgraded JPM along with WFC, AMTD and SCHW while the firm downgraded STT, EVR, and NTRS; Insurance; PRA upgrading to Neutral from Underweight saying after conference calls between management and investors and our own review we think the risk reward for the stock has improved; Consumer finance and lending mixed in recent days as credit card related names DFS, COF, ADS, AXP been in recent decline while names like SQ, PYPL have been surging day after day to record highs (SQ downgraded at Cowen today on valuation)

Healthcare

·     Pharma movers; OPTN signed an agreement with pharmaceutical firm Kaleo to co-promote its XHANCE exhalation nasal spray for the treatment of nasal polyps in adult patients; AIMT entered into a clinical trial agreement (CTA) with Roswell Park Comprehensive Cancer Center to support latter’s Phase 1/2a trial of Ampligen (rintatolimod) in combination with interferon alfa-2b, in cancer patients with COVID-19; LLY is not planning to publish Phase 1 safety results of the company’s experimental antibody LY-CoV555 as per Morgan Stanley following IR conversation; officials from AZN, MRK, JNJ, MRNA and PFE will testify at hearing on July 21

·     Biotech movers; REGN upgraded to buy and raise tgt to $750 at SunTrust based pipeline and conversations with mgmt, we reviewed recent clinical and IQVIA data and added revenue builds and gave additional credit to Libtayo, Dupi, fasinumab and oncology pipeline products; RVMD 6M share Secondary priced at $26.00; QGEN guides Q2 adj EPS 55c-56c vs. est. 41c

·     Healthcare services and providers; WBA shares fell after posting quarterly loss vs. profit a year earlier over non-cash impairment charges of $2B as COVID-19 disrupted business, while adjusted EPS of 83c fell short of the $1.19 estimate; LHCG tgt raised to $220 at SunTrust post upbeat meetings focused on strong core trends, industry tailwinds and superb positioning; HQY 4.6M share Secondary priced at $56.00

Industrials & Materials

·     Industrial & Machinery; PNR was upgraded to buy from underperform at Bank America with $46 tgt saying co should post a solid earnings beat in Q2 thanks to the upside from its pools business; in the waste sector, WCN said it sees 2q revenue down about 4.7% yr over year and sees 2q adjusted ebitda margin down between 90 basis points and 100 basis points YoY; AZZ shares declined following its Q1 earnings miss

·     Transports; Transportation stocks again lag broader market, falling as much as 2% as the punishment in airlines stocks as more cases rise in the US threatening travel bans to certain states/or quarantines weighs on the industry (UAL, AAL, JBLU among top decliners); truckers (JBHT, EXPD, LSTR) again outperform in the sector

Technology, Media & Telecom

·     Internet; Social media names continue to push higher almost daily, with Morgan Stanley upping its tgt on FB to $270 from $230 (remains “top pick”), GOOGL tgt to $1,700 from $1,400, SNAP to $25 from $13, PINS to $26 from $25 and TWTR to $32 from $24 seeing a boost to ad revenue from a rise in e-commerce; SNAP shares slipped on headlines TikTok distancing from China (shares had been higher in recent days on reports US may look to ban TikTok in US); BABA, BIDU and other Chinese ADRs have been surging as Chinese markets rise for an 8^th day overnight; AMZN, EBAY, NFLX, SPOT yet again making 52-week highs

·     Semiconductors with a massive bounce as the Philly semiconductor index (SOX) trades to new record highs topping the 2,075 level as AMD rises over 5% and MCHP jumps after CEO details growth in no lead time orders – just another day of upward momentum in chip names (52-week highs for TSM, NVDA, MRVL, MPWR, ASML); KLAC was downgraded at Cowen on valuation

·     Software movers; SAP said business activity "gradually improved" in Q2, based on preliminary results/said during Q2, revenue grew 2% YoY to €6.74 billion, led by a 21% improvement in cloud-related sales; Citigroup with a few ratings changes as they downgraded FSLY to sell from neutral on lower margins and semi-recurring revenue leaving revenue to do heavy lifting to maintain multiples, upgraded CRWD to neutral from sell and raised tgt to $116 as expects continued end-point security share gains to keep growth above street, and upgraded NICE to buy from neutral as expects cloud can continue to benefit while on-prem estimates are de-risked; VERI rises as raises Q2 revenue view to $13.1M-$13.3M from $11.8M-$12.2M (est. $11.95M) while ups its Q2 net view to ($6.0M)-($5.8M) from prior loss ($6.5M)-($6.1M)

·     Hardware & Component news; CSCO upgraded to overweight from equal-weight and raise tgt to $54 from $46 at Morgan Stanley saying recent survey suggests overall networking spend in CY20 to fall 2.5%, but expects earnings recovery in long-term; FFIV was upgraded to overweight at Morgan Stanley, saying there was uncaptured value in the company’s software business and an opportunity to attract renewed attention to FFIV from a more software focused investor base; SNE investing $250M in Fortnite publisher Epic Games